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For Organizations and Social Entrepreneurs

Considerations

What is the appetite for entrepreneurial ventures, risk tolerance, and mission fit?

Starting a PPESCO involves five general considerations:

  • Mission / culture fit. Organizations with active programs in energy savings are optimally positioned to add PPESCO activities to their service offerings. Organizations must have existing expertise in energy performance in buildings. Mature organizations unaccustomed to new business start-up might have difficulty with the sort of entrepreneurial culture that is required of a start-up.
  • Experience / skills fit. An organization that is considering a PPESCO will need to assess the ways in which its current operations fit the business concept, and what gaps must be filled. A mature organization delivering energy retrofit programs could be very well positioned to move from launch to large-scale operation in a few years. An organization that does not possess key talents, skill, and experience will need significantly more time and capital to create an effective operation.
  • Risk tolerance. A new PPESCO requires the attention and resources of senior leadership, buy-in from the Board of Directors, and a minimum three-year commitment of relevant assets: access to networks, funder relationships, staff time, office space, and supplies. Prospective PPESCO organizations should also assess their respective appetites for financial and organizational risks that come with any new venture, and particularly one requiring a long-term commitment to clients and funders.
  • Early clients. A new PPESCO needs time in the early years to climb up the learning curve, which will be different for each organization. If this can be done with friendly parties (with whom the parent organization has positive relationships), then the PPESCO is able to leverage existing networks for more rapid market entry.
  • Portfolio approach. As a new PPESCO begins its portfolio of projects, it should seek to balance:
    • Size. Although a mission-driven impetus might exist to help prioritize smaller projects, the economics of the business indicate that larger projects are generally more profitable than smaller ones. Given the transaction costs of a PPESCo deal, a $100,000 project will be inherently less profitable than an $800,000 one. All projects need to be economically viable on their own. But because smaller projects can be bundled with other more profitable projects into portfolios, a PPESCO is likely to be able to manage the risk offered by a single, less profitable project. That is, diversification of projects by size and number can collectively extend the profitability of a greater number of projects.

    • Sector. Public-purpose buildings have important differences within this market classification. Educational buildings have different layouts and uses than do health care facilities or affordable housing. Public-purpose buildings, unlike commercial buildings, don’t often change owners or go away. Each has its own operational complexity, sales cycle, ownership, and financial resources. Affordable housing has access to funding that other building types do not. Schools might be unable to use available general construction funds for energy improvements. Heath care is increasingly being affected by the Affordable Care Act, especially its cost control goals. PPESCOs can actually help health care facilities meet those goals, because of the energy savings guarantees that help reduce energy bills (and thus lower operating costs). Some sectors and projects can use tax incentives (for example, Investment Tax Credits), whereas those with renewable installations could access renewable tax credits and power purchase agreements (see Resources).